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WASHINGTON (Reuters) - Not since Gary Gensler pinned on his badge as the $600-trillion (367 trillion pounds) swap market's new sheriff has his law-and-order campaign seemed so uncertain.
Delays are setting in at the Commodity Futures Trading Commission, which he chairs, and at other U.S. regulators, such as the Securities and Exchange Commission.
The European Union is only in the early stages of its clean-up campaign and very little has happened in Asia.
Seven months into a gruelling push led by Gensler for more transparency and accountability, momentum for change seems to be faltering in the vast and profitable market dominated by giant financial institutions such as JPMorgan Chase & Co (JPM.N) and Citigroup (C.N).
A key turning point will come when Treasury Secretary Timothy Geithner soon decides whether foreign exchange swaps should be exempted from new clearing requirements. Gensler has urged the narrowest possible exemption on this front.
If Geithner backed a wide exemption, it would be a sign that the Obama administration is "not really messing with the current business model that caused all the trouble," said Robert Kuttner, an economist at liberal think tank Demos.
"Republicans are trying to cut Gensler's funding ... With Europe waiting for Washington to move first, this tends to undercut stronger regulation in Europe," he added.
The issue has important implications for the future of the world financial system as it recovers from the 2007-2009 banking crisis and the economic recession that followed.
In the crisis, over-the-counter (OTC) derivatives -- financial contracts that are traded privately among big, bank-controlled dealers, rather than on regulated exchanges -- amplified risk in the system because they were so opaque.
Last year's Dodd-Frank financial reforms mandated that OTC swaps be regulated for the first time; that many be traded on exchanges or equivalent trading platforms; that most be backed by clearinghouses; and that more information about them be made public.
The goal is to make swap pricing more open and competitive, and to prevent a recurrence of the near-panic over contracts such as credit default swaps that led to the government-led rescue of Bear Stearns, the collapse of Lehman Brothers, and the bailouts of American International Group Inc (AIG.N) and other firms.
Failing to fully rein in the swaps market would risk exposing the financial system to a replay of 2008, say advocates of Dodd-Frank, though many industry officials disagree.
Swap market reform always looked like the trickiest part of Dodd-Frank. And as it turns out, it is.
Nowhere has the burden of rule-making been heavier than at Gensler's CFTC. In a burst of activity, the agency has proposed more than 40 new regulations, but few are finalized and the agency has not yet defined which swaps are covered. Nor has it released dealer capital and margin requirements.
Another big issue still unresolved is the fate of swap end-users, which range from airlines to agribusinesses .
Such companies hedge the risk of changing costs to their operations by using OTC derivatives -- essentially bets on changes in an underlying financial value such as the price of jet fuel or fertilizer. End-users for the most part want to carry on trading swaps as before, off-exchange and without mandatory clearing, which Dodd-Frank broadly would allow.
"The interesting thing here is the end-users ... They're getting ripped off by not putting it all on exchanges. But they're totally captured by the broker-dealers. It's fascinating," said Simon Johnson, a Massachusetts Institute of Technology business professor and author of "13 Bankers," a book about the financial crisis and subsequent reforms.
Dodd-Frank targeted July 2011 for finalizing many new CFTC swaps rules. Key parts of the new regime are on track to be completed in months ahead, but Gensler said on March 16 that some July deadlines will be missed.
SEC Chairman Mary Schapiro said earlier this month her agency will miss some Dodd-Frank deadlines. Like Gensler, Schapiro is distracted by attacks on her agency's funding from Republican opponents of Dodd-Frank in Congress.
The full array of CFTC rules on swaps will not be finished for some time, said Robert Pickel, executive vice chairman of the International Swaps and Derivatives Association, a group that represents the industry.
"It's basically six months before they'd ever get everything finalized. So I think realistically we have to think in those terms," Pickel said.
Delays in the United States, slow EU progress and little action in Asia raise questions about regulatory arbitrage in the absence of a consistent world regulatory framework.
"My perception is that it's still wide open at this point," said Nicolas Veron, a senior fellow at Bruegel, a think tank located in Brussels, the home of the EU.
"The final rules will probably not be known in Europe before at least a year from now. So the U.S. decision-making is going to come first," he said.
Pickel added: "It's going to be a more fragmented process (in Asia) because it's a more diverse market with a lot of important local institutions."
For instance, he said: "Singapore has a history of encouraging business development and I would not be surprised to see them considering opportunities that may be presented by regulatory developments elsewhere."
Despite delays and uncertainties, the conventional wisdom on swaps has taken a sharp turn from the deregulatory consensus of just a few years ago. There is now wide agreement, even within the industry, that the swaps market will change. What remains to be determined is by how much.
More swaps will become standardized and eligible for exchange trading, though many will remain customized and in the off-exchange sphere, Pickel speculated.
"Who knows exactly what the mix is, and it will vary from product to product, but there will still be a significant bespoke, more customized trade," he said.
Editing by Gerald E. McCormick