First, there have to be strong incentives in the system – such as capital requirements on banks and securities dealers – to provide an impetus for dealers to standardize OTC derivatives trades whenever practical. The goal is fewer bespoke trades and more standardized trades. Second, the G20 leaders agreed that all standardized OTC derivative trades should be mandatorily cleared through CCPs by the end of 2012. Third, records for all OTC derivative trades – including bilateral bespoke trades – must be reported to trade repositories. The data as part of this reporting requirement would include key trade attributes and a legal entity identifier so that aggregate exposures could be readily calculated. Fourth, the two standard-setting bodies mentioned earlier – CPSS and IOSCO – would strengthen and broaden the principles for financial market infrastructures. Fifth, these Principles would be adopted globally, strengthening the resilience of the financial system. The logic behind these five elements of reform goes like this: Standardizing trades improves transparency and price discovery. This mitigates the opaqueness that helped to generate the illiquidity and loss of market function evident during the crisis. Requiring that such trades be cleared through CCPs is designed to reduce the aggregate amount of risk in the system. That is because the gross exposures can be netted down when all the dealers clear through one common central clearing party. In a CCP framework, the bilateral exposures of each dealer to one another are replaced by a single set of claims to and from the CCP.
(X) “A million dollar question” has been asked at Forbes, about whether exchange rate stability can be maintained under such circumstances. The answer is: yes, given the current modalities, it can be maintained as long as we manage to repay our debts and as long as we can obtain new loans from abroad. In this respect, the current world situation is favourable, because free liquidity grows again and waits to be placed, credit supply goes up and buyers are sought for this money. A continuation of EU accession negotiations improves the political perception of Croatia as a debtor. Therefore, I have no doubts that the current search for a billion dollars, or euros or whatever, will be successful. This is a relief, but it also poses the most serious dangers to this country: the danger of inactivity, the danger of believing that we can go on functioning by following the established routine and the danger that we neither have learned, nor will learn enough from the crisis. It is often repeated that our problems are of a structural nature and that it takes time to carry out the necessary reforms. This statement is not unfounded. However, an old Chinese wisdom says: “Even the longest way starts with the first step.” The truth is that the first step is often the most difficult, and we have been putting it off for a long time. BIS Review 2/2010  3