http://www.bankofengland.co.uk/publications/Pages/inflationreport/2016/aug.aspx 4  All speeches are available online at www.bankofengland.co.uk/speeches  4  In auctions we offer to buy across the range of eligible assets the MPC has specified, pre-define the mechanisms we will use to weigh the competitiveness of offers, and then passively respond to the pattern of bids that we receive in any given auction. Our judgement last summer was that the MPC’s corporate bond purchase objective would probably also be best achieved using auctions, but that we would need to make a number of changes relative to the pre-existing gilt auction design to cater for the differences in the underlying markets. Let me highlight this by explaining three of the main, mutually reinforcing, changes that we made, informed by auction theory and expert advice. First, the size of our purchase operations were designed to be flexible, adjusting automatically to reflect the quantity and quality of the offers received. This means the purchase pace can fluctuate to account for seasonality, market conditions and so on. It also encourages greater competition between offers, as some offers are likely to be rejected, even in auctions where there are a smaller total number of offers. By contrast our gilt purchases are made at a pre-announced pace through fixed-size auctions. Second, we changed our allocation method within our auctions with the aim of promoting participation and competition. Experience has shown that the competitive nature of the gilt market routinely delivers 8  widespread participation in our auctions.
The risks depend, for instance, on how well-diversified the credit portfolio is. The more concentrated it is to certain industries and countries, the greater the capital requirement. A portfolio where the risks are well spread instead reduces the total risk in the portfolio and thereby the capital requirement. This means that the banks  BIS Review 24/2007  5  may have reason to sell some of the risks that arise in their own credit granting and to buy others instead. The current rules do not allow the banks to reduce their capital very much when they use credit derivatives. Basel II increases the opportunities here. It is also likely that the credit derivatives market will to a greater degree develop to include traditional loans. It is already possible to obtain prices for credit derivatives for companies that do not have bonds issued on the bond market. This is on condition that the loan documentation meets the predetermined requirements. It increases the opportunities for Swedish banks to use credit derivatives to sell parts of their own credit risk. Concluding remarks Let me round off. My assessment is that the advantages of credit derivatives exceed the risks for the economy. They have revolutionised the trade in credits in important aspects. The problems related to the market infrastructure are being dealt with successfully and there are many indications that the risks in this field are declining as the market matures. The financial sector has also improved its routines for risk control over the past ten years.