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WASHINGTON (Reuters) - On Monday, October 15, top U.S. derivatives regulator Gary Gensler watched a mock ceremony to mark the start of a broad overhaul of the swaps industry that started that day.
In a conference room at the Commodity Futures Trading Commission (CFTC), two senior staff members cut a white ribbon hanging over a copy of the 2010 Dodd-Frank act.
Yet the preceding Friday, the agency had slipped through a batch of letters to grant exceptions to the rules it was now celebrating.
The last-minute changes, critics say, were a telling sign of the overly aggressive way in which Gensler - himself a former Goldman Sachs banker - is tackling the post-crisis clean-up of Wall Street.
The agency's staff has sent out more than 50 letters granting temporary reprieve from the rules after industry complaints this year.
So far the CFTC has completed two-thirds of the rules Congress told it to write to revamp a swaps markets blamed for exacerbating the 2008 financial crisis. The clampdown may make the business far less lucrative for the large investment banks that dominate it.
What remains to be done - rules that govern swap trading platforms, safety buffers for uncleared swaps, and guidance on how the agency's rules apply abroad - are the final building blocks that need to be put in place in coming months.
A failure to complete the process in a smooth and timely fashion could drive away investors already worried the watchdog's clampdown will make swaps more expensive to use.
"By any measure, (the CFTC) has really done a terrific job, under incredibly adverse circumstances," said Dennis Kelleher, who heads Better Markets, a Washington-based group advocating tougher rules for the financial industry.
A groundswell of discontent about the CFTC's handling of the rules was only to be expected, he said, as the $650 trillion derivatives industry - largely in use by financial speculators - is being regulated for the first time.
"(In) every part of the process ... we've seen Wall Street use its unlimited resources to either kill, cut or loophole first the law, and then the regulations," Kelleher said.
At around $200 million, and only slowly rising over the past years, the CFTC's budget has not kept up with the its vastly expanded powers over the swaps market, eight times the size of the futures market it already oversaw.
The U.S. financial industry equally spent hundreds of millions of dollars on lobbying Washington to put more business-friendly measures in place in each of the past two years, according to research group Open Secrets.
The stakes for the industry are high. Wholesale derivative brokers such as ICAP, Tullett Prebon, GFI - which arrange deals between banks - are in the dark about what business will look like.
They plan to set up swaps trading platforms - called Swap Execution Facilities, or SEFs - a key prong in the Dodd-Frank law to end the practice of bilaterally agreed deals between brokers for their clients over the phone.
"We would prefer to see the (rules) finalised and move forward," MarketAxess Chief Executive Rick McVey told Reuters. "All of us have now been investing lots of money for two years to be a SEF and we still don't have certainty."
The rough outlines of the rules are clear, but details such as how much dealing can still take place over the phone, and below which threshold swaps need to delist are crucial in determining how profitable the business will be.
Investment banks such as JPMorgan, Bank of America, Citi and Goldman Sachs are keenly awaiting another decision, which will determine how profitable swaps trading is for these big derivative houses.
Together with a host of bank regulators, the CFTC is determining how much safety margin swap traders will need to put up to protect against counterparty default, something that is likely to raise the cost for such deals.
Banks are worried that investors will start using contracts such as futures if swaps trading becomes too expensive. Futures can be used much in the same way as swaps, but the banks say they are less sophisticated.
An even thornier issue is how the CFTC's rules apply to banks abroad. In July, the CFTC issued an order that drew anger from European and Asian regulators, who blamed the regulator for encroaching on their territory.
Two commissioners said last week they hoped to finalise the order this year, possibly easing the rules for foreign dealers. With only a few days left before the Christmas holiday, it's another big outstanding task.
And even if the CFTC succeeds in putting out the order, it is unlikely to include the issue of how it relies on foreign regulators, which could determine how much business foreign banks can do with U.S. rivals.
The CFTC is also fighting industry challenges in court. Last week, it booked a legal victory against the mutual funds industry when a judge ruled in favour of a rule two trade groups had sought to overturn.
It is still appealing a September court ruling that threw out a rule to curb speculation in commodity markets by capping trading positions to a maximum limit. At the same time, it is drawing up a new rule, should the appeal fail.
With those bits of the business unfinished, lawyers will remain busy telling clients which rules to comply with for several more months. But even they admit that the CFTC's job was a formidable one from the beginning.
"I understand that regulators make the point it's very difficult," said Anna Pinedo, a partner at law firm Morrison Foerster in New York. "You've got a market that is huge, that's international and that grew up without regulation."
Reporting by Douwe Miedema; editing by Andrew Hay