In today’s markets, there is a large premium on ex ante clarity and certainty, as opposed to ex post negotiation amongst bankers who know and trust each other. The work required is detailed and largely out of the limelight. But getting clarity around things like “close out netting” may make all the difference when the music stops. 11 The official community therefore needs to maintain its encouragement and support for private sector initiatives to standardise and improve documentation. To take just a few examples from what could be a long list, this includes the work of New York’s Global Documentation Steering Group; of various market trade associations; and of London’s Securities Lending and Repo Committee, which helps co-ordinate the work of different parts of the collateral-financing markets. 12  Summary I have travelled from macro to micro. To maintain the two elements of monetary stability – price stability, and financial stability – we need credible and effective institutions. 11  Close-out netting is a process by which, following a default, open transactions between two parties are terminated, each transaction is valued and, together with any outstanding payments, these are reduced to a single net amount owed by one of the parties to the other. Obtaining legal certainty over recognition of netting across different products and, in particular, with different legal entities with a common group is very important.
The FOMC also indicated that it anticipates that these caps will remain in place once they reach their respective maximums. Over time, as the Fed holds fewer securities, the private sector will gradually hold more. At the same time, Fed liabilities held by the private sector, in particular reserve balances, will decline equivalently. Panel 2, which draws on a July 2017 update to the System Open Market Account annual report, illustrates how the caps will evolve in relation to anticipated maturities of Treasuries, on the left hand side, and agency MBS on the right. As can be seen, once the caps are fully phased in, in many months the caps are not expected to be binding, and so there would be no reinvestments 3/7  BIS central bankers' speeches  in those months. However, the caps will be exceeded in months with large Treasury maturities, and we would reinvest the amount above the cap. For agency MBS, a change in conditions could encourage faster MBS repayments than are shown here, producing monthly paydowns larger than the 20 billion cap and thus some reinvestments—an issue I will return to later. Policymakers have indicated that they want the portfolio’s size to decline “in the background,” and that the federal funds rate will be the primary instrument of monetary policy. Balance sheet normalization is expected to continue until the FOMC judges that the Federal Reserve is holding no more securities than necessary to implement monetary policy efficiently and effectively.