The proliferation of electronic trading and banking may not only improve the efficiency with which transactions are executed, but also may accelerate the rate at which capital flows through global financial markets. The rewards of increasingly open financial markets may be great, but the punishment for poor investment decisions and lapses in public policies may be comparably severe. Thus, global financial markets are likely to place a greater premium on robust risk management practices. The Year 2000 computer problem is a third issue that needs to be a top priority for risk managers. One need only look at the price action in interest-rate futures markets to note the high degree of uncertainty surrounding this issue. While an organization may have prepared its internal systems, it still may be exposed to credit risk from less-prepared counterparties in both the public and private sector. Thus, I fully support the contingency plans a number of institutions are putting in place. I think it is important to make clear that it is the boards of directors and senior management of financial institutions – not the regulators – who must be responsible for ensuring that their BIS Review 8/1999  –3–  companies provide seamless and high-quality service through the year end. The Federal Reserve System has completed the internal testing of almost all of its applications. In addition, the governments of various industrialized nations stepped up their internal Y2K remediation efforts last summer.
Mr McDonough focuses on the importance of risk management techniques and the enhancement of market discipline Remarks by the President of the Federal Reserve Bank of New York, Mr William J McDonough, before the Bond Market Association in New York on 21/1/99. Good morning. It is a pleasure to be here today and I thank the Bond Market Association for giving me this opportunity to share some of my thoughts about supporting the resiliency and liquidity of our capital markets. As you recall, last August the Russian government announced an effective devaluation of the ruble and declared a debt moratorium, shocking investor confidence all over the world. Against the backdrop of weakened economies and financial markets in many developing countries, global equity and debt markets became increasingly volatile. In the U.S., a number of market observers had anticipated a correction in stock prices. However, the simultaneous and abrupt widening of credit spreads went far beyond the expectations of investors and financial intermediaries. We are all familiar with the immediate consequences of these dramatic events. What is most important, it seems to me, is to try to understand what public and private entities can potentially do to prevent, mitigate, and manage financial uncertainty in the future. In the face of the recent events in Brazil, the launch of the euro, the countdown to Y2K, and the extraordinary market volatility of the last 18 months, all of us are obliged to think carefully about our responsibility to support the functioning of liquid and efficient financial markets.