Third, efforts are underway to reduce counterparty risk exposures by requiring that over-thecounter (OTC) interest rate swaps, credit default swaps, and equity and commodity derivative trades be standardized where feasible – and that all standardized trades be cleared through central counterparties (CCPs). Standardized clearing through CCPs reduces  BIS central bankers’ speeches  5  the complex web of counterparty exposures that exist in the bilateral world of OTC derivatives. Everyone that centrally clears becomes the counterparty to the CCP. This enables a high level of gross bilateral exposures to be netted down to a much more manageable set of net exposures to the CCP. Fourth, recognizing that mandated central clearing will only reduce risk if the CCPs themselves are robust, efforts are underway to strengthen financial market infrastructures. In the United States, for example, the Dodd-Frank Act instructs the Financial Stability Oversight Council to designate certain financial market utilities (FMUs) as systemically important. Such FMUs would be subject to a tougher regulatory oversight regime. On a parallel track, at the international level, the Committee for Payment and Settlement Systems (CPSS) and the International Organization of Securities Commissions (IOSCO) are revising and strengthening a set of regulatory oversight principles and minimum business standards for financial market infrastructures (FMIs). These principles include numerous standards with respect to governance, access, risk management practices, and capital and liquidity standards.
In an integrated global economy, severe negative consequences can be felt far away from the center of the financial crisis – as they were in Asia in late 2008 and early 2009. This underscores our common interest in promoting financial stability on a global basis. Truly effective reform would generate sizable and widespread benefits. However, there are significant challenges to achieving this. One challenge arises from the fact that we have a global economy with many large, globally active financial firms, but our regulatory regimes are implemented at the national level. Another is that any attempt to improve regulatory standards will inevitably meet with resistance from parties that have a vested interest in the status quo. Today I will comment on the actions underway in the United States and internationally to make the financial system more resilient and robust. I will focus on the logic behind the reform efforts, progress to date, and areas where there still is considerable work to do. As always, what I have to say reflects my own views and not necessarily those of the Federal Open Market Committee, the Federal Reserve System, or my international supervisory colleagues with whom I work closely with on a regular basis. The financial crisis exposed significant vulnerabilities in the financial system. Without revisiting all the causes and consequences of the credit boom and bust that led to a boom and bust in the U.S. housing market, the bottom line is that our regulatory system failed in two important dimensions.