Policymakers simply cannot dictate the details of risk management based upon assumed market developments. Markets currently are in tremendous flux, and policymakers cannot foresee the needs in future years. Thus, the soundest course is to create a clear legal and regulatory environment within which market participants can develop risk management tools as needed.
In some instances, rather than mandating certain steps, policymakers might provide proper incentives for risk-reducing steps through capital requirements or disclosure regulations. The recommendations in the Working Group’s report on OTC derivatives, in particular, aim to clarify the legal status of electronic communication, trading, and clearing systems. These recommendations, if implemented, offer a variety of enhanced risk management tools to market participants.